While Price Outlook Is Great, Industry Could Suffer

Fri, 2010-12-31 11:11

“It’s pretty easy to be bullish on cattle prices as forecasts call for still higher prices again next year. But it’s quite a bit harder to be bullish on the overall industry's market structure when it’s uncertain which operators will be around to enjoy those high prices,” says Darrell Mark, University of Nebraska-Lincoln Extension livestock marketing economist.

“It’s pretty easy to be bullish on cattle prices as forecasts call for still higher prices again next year. But it’s quite a bit harder to be bullish on the overall industry's market structure when it’s uncertain which operators will be around to enjoy those high prices,” says Darrell Mark, University of Nebraska-Lincoln Extension livestock marketing economist.

Mark says he’s bullish on prices because cattle inventories are at historically small levels. Conversely, he’s bearish on market and industry structure for the same reason.

“Clearly, the declining beef cowherd, low heifer retention, and small calf crop point to lower cattle supplies and beef production for the next couple of years, which alone is supportive to price levels. However, this continually smaller cattle inventory is becoming profoundly more important due to the long-run impacts it has on industry structure,” he says in the Livestock Marketing Information Center’s In the Cattle Market newsletter.

In an attempt to satisfy the short-run demand for beef with a smaller cattle inventory, the industry has been slaughtering more females – both cull cows and fed heifers, he points out. In fact, even back in May 2010, heifer slaughter accounted for around 28% of federally inspected (FI) slaughter. By the end of 2010, over 30% of FI slaughter was fed heifers.

During that same time, cow slaughter increased from 17% of FI slaughter to more than 20%. Steer slaughter dropped from about 53% to 47% of FI slaughter. “The problem, of course, with trying to maintain beef production in the short run by elevating female slaughter is that it leaves fewer females in the breeding herd, which makes beef production in the long run that much lower,” he says.

Mark says the female-to-steer slaughter ratio has been increasing for the past five years and neared 100% in 2010. The historical impact on beef cow numbers is fairly evident when this ratio is at or above 100% – cow numbers decline for several more years. It isn't until a female-to-steer slaughter ratio approaches 90% that the beef cowherd inventory begins to increase.

“The declining size of the beef cowherd and resulting calf crop has important implications on the cattle-feeding and beef-processing sectors. Each has been running below capacity for the last couple of years, which is economically inefficient. Most margin businesses such as these would prefer to be close to 90% capacity or more,” Mark says.

But he points out that cattle feeders in Nebraska were closer to 75% last summer. While that’s increased to more typical levels this fall, it isn't true for cattle feeders in parts of the country with higher costs of gain.

“If the long-run trend toward fewer cattle continues, that suggests that there will be fewer feedyards and fewer beef packers and processors as well. Not only would that be devastating for the families and companies that find themselves squeezed out of the market, but it would have a significant impact on employment and other indirect impacts on the rural communities where they are located. Further, this isn't isolated to the feeding and processing sectors of the industry. Cow-calf producers will be similarly affected,” Mark says.

Long-term beef demand is another issue. Commercial beef production is forecasted to decline 2% in both 2011 and 2012, while commercial pork production will be steady in 2011 and up 1-2% in 2012. But poultry production is expected to grow about 2% in 2011 and 3% in 2012.

“As the beef industry continually produces less beef each year, consumers necessarily will eat less beef and prices will rise. Although it depends on the relative quantity and price changes and the elasticity of demand, this will likely translate to a decrease in beef demand. Further, higher beef prices could cause consumers to shift away from beef to poultry. While this isn't a certain outcome yet, the stage appears to be set for this to play out,” Mark says.

“The biggest ‘if’ in this scenario is whether consumers will return to higher levels of beef consumption once retail supplies of beef begin growing, which will be several years down the road. If they don't, the size of our industry could forever be reduced, unless exports grow even more rapidly than they have been.”

So, what’s a producer to do with information like this that is apparently bullish on prices and somewhat bearish on the industry structure? For the cow-calf producer, it’s time to create heifer-development budgets and weigh those returns against potential feeding profits, Mark says. Meanwhile, the cattle feeder needs to make plans for operating at lower capacity.

“There will certainly be a lot to sort out in the upcoming year, but cattle producers as a whole always do the 'right' thing according to the economic incentives in the market. The resiliency of the industry will therefore continue into 2011 and beyond, but we need to be prepared for it to look a little different by the end of this next year,” Mark says.-- Darrell Mark, LMIC’s In The Cattle Markets